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38 POLICY • Vol. 30 No. 4 • Summer 2014–2015
PICKING APART PIKETTY
(Winship 2014a, Burkhauser & Larrimore 2014;
see also Milanovic 2013). This also means that
Capital overstates the share of total income earned
by the rich.
With the increases in the welfare state over recent
decades, the problems caused by this omission are
getting worse over time, with many payments and
most government spending on subsidised services
increasing faster than inflation, and the number
of welfare recipients, particularly age pensioners,
growing quickly.
The omission of income support and welfare is
particularly odd because Capital discusses at length
the development of the welfare state (Chapter 13).
Regardless, Piketty ignores his own discussion when
putting together the data for Capital, effectively
implying that income support and welfare are not
important to recipients—only private income is
important. This would come as a surprise to those
people who depend on government support.
A number of studies find different conclusions
when this omission is corrected. The data source for
Capital has the income of the bottom 90 percent
in the US falling by over $US 3,000 from 1979
to 2012, whereas income after taxes and transfers
actually increased by nearly $12,000, or $21,000
if the value of health care is included (Winship
2014a; see also Hagopian and Ohanian 2012).
Conversely, the share of US disposable income
going to the top 1 percent, including taxes and
welfare payments, was around the same level in
1987–1988, 1996, 2001, and 2009 (Kaplan & Rauh
2013), although the proportion was significantly
higher in some other years.
If the value of government services were
included this would also result in a decline in
measured inequality. Across the OECD, these
services increase effective household income by
about 27 percent, and particularly reduced
inequality in the U.S. (Verbist, Förster, and
Vaalavuo 2012).
There is also an important methodological
problem with the omission: it is wrong to complain
about increases in income inequality without
measuring the things that reduce inequality
(Worstall 2014a). The omission of this data in
Capital is like turning off the lights and then
complaining about the encroaching twilight.
Non-taxable Income
There are a range of tax exemptions that cause a
divergence between taxable income and economic
measures of income. Income that is likely to be
exempt from tax, and therefore excluded from
Piketty’s data, include capital gains on the sale of
the home (Winship 2014a) and the imputed rent
from owner-occupied houses (Cross 2014, Bonnet
et al. 2014).
The benefits of these tax exemptions are spread
throughout society, and are not only available
to the most wealthy, so this omission means that
the data in Capital overstates income inequality.
For example, the Australian Bureau of Statistics
(2013, p27) has said that including imputed rent in
income reduces measured inequality and allows
for a “more meaningful” comparison of income
circumstances.
Piketty’s data also excludes some fringe benefits
such as private health insurance in the U.S.
(Winship 2014a); this exclusion substantially
overstates measured U.S. inequality (Burkhauser &
Simon 2010).
Piketty does discuss the impact of non-taxable
income on his data (p. 282) but only focuses on
exemptions that benefit the wealthy, missing the
exemptions that have broader benefits.
Capital Gains
Most tax systems only record capital gains in the
year in which assets are sold, which means capital
gains are mismeasured. An asset that gains value
every year for 20 years and then is sold in the final
year appears in Piketty’s data to generate no return
for 20 years and then generate an enormous return
in the final year. This clearly causes a fictitious
increase in inequality.
It is difficult to correct for this measurement
problem, but one study (Armour, Burkhauser
and Larrimore 2014) finds that if capital gains
are measured when they are accrued rather than
realised, then U.S. income growth from 1989 to
2007 was slowest for the top 20 percent and fastest
for the bottom 20 percent.
Changes in Definition of Taxable Income
The definition of taxable income changes over
time, another reason why Capital has mismeasured